Why Pharma Faces So Many Corruption Allegations

Yesterday, at 9am in the morning, South Korean police stormed into the offices of the
Novartis. Local authorities suspected that the Swiss pharmaceutical giant had provided illicit rebates to local doctors.

The allegations relate to whether the practices were part of a wider system of bribes between Novartis and local doctors. Accounting records as well as other financial documents were confiscated by the Seoul Western District Prosecutors' Office. The investigation is in the early stages and prosecutors have stated that the raid was “part of an investigation into finding out how the rebates were offered”.

Pharmaceutical companies are facing an increasingly harsh spotlight in the current regulatory environment. Only earlier this month, SciClone Pharmaceuticals settled more than $12 million in fines from US prosecutors after it violated the Foreign Corrupt Practices Act. The California-based company provided gifts to doctors in China to increase the sale of its drugs.

The biggest scandal in recent times relates to
GlaxoSmithKline in China. In this instance, the UK-based pharmaceutical company has been prosecuted by local authorities. In 2014, GSK was found guilty of bribery and order to pay $490 million. Again, the drugs company was charged with bribing doctors and hospitals to promote GSK products.

The sheer number and size of recent prosecuting actions taken against pharmaceutical companies underlines the sector as ‘high risk’. A GSK executive told me in 2014 that anti-corruption efforts was the primary business issue for the company. Despite this prioritisation of compliance, the companies has subsequently found itself embroiled in new scandals. In 2015, Romanian prosecutors opened a fresh set of allegations about improper payments.Earlier this month, UK authorities fined GSK for paying other pharmaceuticals to prevent their issuing of generic drugs into the marketplace.

According to Robert Klitgaard (one of the most highly regarding researchers into corruption) corruption equals monopoly plus discretion minus accountability. The highly fragmented nature of medicine, where markets are constituted of clinics, surgeries, pharmacists, hospitals to individual doctors means that discretion is very high.

Indeed, economists often struggle to understand the market: demand (in the form of the diagnosis and prescription) is set by the supplier (the doctor who issues the drugs). The patient (or consumer) is almost entirely subject to these decisions and has little recourse to seek an alternative.

As such, pharmaceutical sales agents (whether acting rogue or otherwise) have manifold temptations to offer a bung to local doctor, with little accountability to superiors or patients about deal.

Unfortunately, this is a structural problem within the industry. Corruption will persist until the pharmaceutical companies can establish airtight compliance processes to address this. The cost of these processes is likely to be astronomic, given that they affect so many complex relationships. A cynic might argue that these costs outweighs the regular fines which are issued more as a ‘business risk’ than a moral imperative.

The raid on Novartis' offices in South Korea is unlikely to be the last anti-corruption prosecution we see in the pharmaceutical sector.

I am a researcher into supply chain management and corporate procurement. I am Head of Strategy Research at Procurement Leaders, a global community providing market intelligence, data, education and networking services to procurement executives and their enterprises. We wor...